RINs rally to spill over into 2017
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Current year D6 RINs values rose by 56pc, or 39¢, since the start of 2016. While the cellulosic D3 and D7 mandates, along with the advanced D5 mandates, will also generate shortfalls this year, record biodiesel and renewable diesel imports will generate a surplus of roughly 164mn credits this year, representing 4.5pc of the overall advanced mandate.
This will serve to lessen the impact of a draw of just under 200mn RINs on banked credits in order to meet this year's biofuel mandates, the bulk of which are tied to at least 178mn in fraudulent RIN credits which must be retired this year.
The EPA estimates the RIN bank will end 2016 at 1.54bn credits, representing a draw of 200mn credits since the EPA's last statement on the 2014 RIN bank balance of 1.74bn credits. Yet as the total renewable fuel mandates grow and the bank sees repeated draws, the RIN bank will represent a dwindling proportion of credits in relation to the size of growing volumetric requirements. A bank of 1.54bn credits, for example, covers roughly 8pc of next year's mandate, providing crucial liquidity to a marketplace facing substantial regulatory uncertainty next year.
Chief among next year's regulatory variables is the likelihood of the expiration of a $1/USG blenders' tax credit (BTC) for biodiesel, which looks unlikely to survive the Trump administration. The expiration of this credit, crucial to the blend economics for biodiesel with petroleum-based diesel, will be particularly bullish for D4 credits. The expiration could add around 25¢-30¢/RIN during the first quarter 2017 and more than 60¢/RIN later in the year if the market becomes more certain of the credit's expiration. Evidence of this can be seen as the B16/E16 spread converges with the surging B17/E17 spread, which stands today at 19.25¢/RIN.
Perhaps more importantly, expiration of the blender tax credit would back out crucial biodiesel and renewable diesel imports, which were one of the principal factors in preventing a larger drawdown on banked credits this year. The US imported record volumes of Argentine biodiesel in August at 1.37mn bl and averaged 694,000 bl per month for the year as the fuel is now eligible for both the BTC and RINs. Around 400mn-600mn D6 RINs come from biodiesel imports each year, an essential blendwall safety valve that would be slammed shut if the BTC expires.
Other variables could have a bullish impact on RINs in 2017. These include a potential tax code change which would further disadvantage imports, ethanol's changing role as a high-octane blendstock as sulfur limits are dropped to 10ppm, relatively cheap global oil prices, and the increased market penetration of battery electric vehicles (BEVs).
Downside risk comes almost entirely from the potential for a trimming, or repeal of biofuel mandates under an Environmental Protection Agency run by well-known biofuel critic and EPA head nominee Scott Pruitt. RINs prices tumbled 20pc in the days following his nomination as spooked traders confronted the prospects of material changes to the RFS. Yet disrupting the delicate balance between big oil and the powerful corn and ethanol lobbies may prove beyond the influence of Pruitt's EPA. Bets on a preservation of this critical balance are already evidenced in the RINs market, where prices are recovered nearly 13pc since Pruitts' nomination.
Article by Argus Media.
